UK manufacturing suffers second steepest fall in 20 years-UPDATE

Date: Friday 01 Jun 2012

-UK Manufacturing PMI fall second steepest in 20 years
-New orders still dropping at fastest pace since March 2009
-Weakness in orders from US, Asia, UK and Eurozone
-Increasing weakness in domestic UK market


The Markit/CIPS manufacturing sector purchasing managers’ index (PMI) for the United Kingdom fell to 45.9 points in May (Consensus: 49.8) from 50.2 in April, to levels not seen since 2009, at the depths of the current financial crisis.

The rate of decline in the headline index was the second-steepest in its 20-year history.

That as companies scaled back production and employment as inflows of new business declined at the steepest pace since March 2009 (New orders sub-index: 42.0; Previous: 49.0), amid rising uncertainty among domestic and overseas clients.

Worth noting, the weakness seen was not exclusive to orders from the Eurozone, where demand might be expected to be weak given the debt crisis in which the Continent is now embroiled. This time around there was also weakness in order flows from the US and Asia. The pace at which export orders fell was almost unchanged from April (export orders sub-index: 46.2; Previous: 45.9), when the deterioration in overseas demand was the greatest seen in almost three years.

Over a third of surveyed companies reported a decline in incoming new orders during May. There were reports of clients destocking and postponing expenditure in response to uncertain economic conditions. Some were delaying purchases in expectation of price reductions in coming months.

According to Rob Dobson, senior economist at Markit, “(…) companies are subsequently becoming much more cost cautious, with manufacturers cutting employment for the first time in five months and reducing stock levels in anticipation of on-going weak demand in coming months.

“Barring a sharp turnaround in June, manufacturing output could fall by as much as 1% in the second quarter, making the sector a drag on the broader economy and raising the risk of the recession extending into mid-year. However, with price pressures easing further in May, there may be a window of opportunity if the Bank of England wants to give industry a monetary shot in the arm.”

For their part, economists at Barclays are saying that, “we had already expected manufacturing output to decline in Q2, owing to the loss of production in June as a result of next week's Jubilee celebrations, and had expected to see a recovery in Q3 as the Jubilee effect is unwound. However, today's much weaker-than-expected PMI data suggest that the underlying momentum in the manufacturing sector has gone sharply into reverse. The May outturn may turn out to be a temporary blip. Anecdotal evidence from some parts of the manufacturing sector, such as the car industry, paints a healthier picture. However, the last two occasions that the index fell by this kind of magnitude both presaged sustained weakness in activity, and so we would not necessarily expect to see a bounce-back in June, even allowing for the impact of the Jubilee.”

AB

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